Acquiring and Using Funds to Maximize Value Essay

Review Questions1. What is the key goal that guides the decisions of pecuniary wanglers? What challenges do fiscal managers front when they try to perplex the best sources and physical exercises of silver to meet this goal?The fiscal mangers goal is acquisition, financing, and management of assets. The challenges argon gracement, financing, and asset management decisions.2. List the quadruple canonical types of monetary ratios delectationd to eyeshade a clubs per micturateance, give an example of each type of ratio and explain its signifi burn downce.Liquidity, Solvency, Profitability, and susceptibility are the basic types of monetary ratios. The transparentity ratio is the ratio of au sotic assets to certain liabilities. Profitability ratios indicate managements ability to convince sales dollars into pays and bills merge. Solvency ratios indicate fiscal stability because they measure a companys debt relative to its assets and justness. Two common capabil ity ratios are inventory turnover and receivables turnover. Business manager necessarily to make up what the financial health of the mansion, he would use smooth-spokenity ratio. A melodic line needs to figure come on how to pay bungholecelled the debt to the bank, they would use solvency ratio.A company makes paper plates they need to greet how much profit they can make. They would use profitability ratio. For example, if the bank make up totaled $5,000,000 and its revenues totaled $10,000,000, then using the formula above, we can calculate that banks efficacy ratio is $5,000,000 / $10,000,000 = 50%. This doer that it costs the bank $0.50 to generate $1 of revenue. This is an example of efficiency ratio.3. What are the key questions financial planning must answer? What role does the ciphered income statement and bud perk uped balance wheel sheet breeze in finding answers to these questions?What are your long name goals for the origin? What are the most(prenominal ) significant risks you are facing? How tolerate you mitigated these risks? How do you suffer your market to evolve over the forms to come? Those are the four questions. They provide the answers to these questions. It is a plan to predict and show what can cash in ones chips in meter, it is a prediction for theses questions.4. What is the purpose of a cash bud take up? How can this tool help profligates with rapidly increasing sales? cash in budgets are often used to assess whether the entity has sufficient cash to fill up regular operations. They can use it to figure reveal where coin needs to go or where they need to gain money. It helps financial managers determine when the level is liable(predicate) to need additional funds to meet short term cash shortages, and when surpluses of cash forget be available to pay off loans or to expend in otherwise assets.5. Name and describe 4 commonly used sources of short-term financing.Trade credence, advances from customers, c ommercial banks loans, and financial institutions are types of short-term financing. Trade credit is a loan in the form of acceptables. An advance from customers is the reputed business houses receive a part of the price or payment from the buyers out front the supply of goods. The finance institutions can help the business by providing short term funds.6. What is equity financing and what are its major(ip)(ip) sources? What advantages and disadvantages of are associated with equity financing?Equity financing is the sale of an self-command affaire to raise funds for business purposes. Personal savings, life insurance policy policies, home equity loans, and venture capital are major sources of equity financing. The advantages are it doesnt have to be repaid. They share the liabilities of company with the investors. The disadvantages are you have to share slightly of the ownership, and you have to in like manner share your profits.7. What is financial leverage? How, and under w hat conditions, can financial leverage benefit a company? How, and under what conditions, can it detriment acompany? financial leverage is the use of borrowed money to increase production volume, and sales and achieveings. The use of financial leverage also has value when the assets that are barter ford with the debt capital earn much than the cost of the debt that was used to finance them. If a companys variable costs are high than its fixed costs, the company is verbalize to be using little operating leverage.8. Is it possible for a firm to have too much money? Explain. What role does cash equivalents play in a financial managers strategy to manage cash balances? Yes because it means there can be fusss in the future. They get taxed much and they gaint know what to invest the money in. They use it to show the companys strengths and weakness. The can use it to make balance sheet, cash period of time statement, and income statement.9. Why is the $1,000 you receive today wo rth more than $1,000 you receive next year? What imagination does this illustrate? Why is this concept particularly important when firms treasure capital budgeting proposals?It is worth more this year rather than next year because if you receive it this year and you decide to invest in it you will gain interest on the thousand dollars you accredited this year. It illustrates the concept of interest. It is important for firms because it benefits them in terms of long term investment.10. What is the scratch present value (NPV) of a long-term investment project? specify how managers use NPVs when evaluating capital budget proposals.The NPV of an investment proposal is found by adding the present values of all of its estimated future cash flows and subtracting the initial cost of the investment from the sum. The managers use NVPs when evaluating capital budgeting by most credibly approving a positive NPV because this means the present value of the expect cash flows from the projec t is greater than the cost of the project. And a negative NPV means that the present value ofthe expected future cash flows from the project is less than the cost of the investment.Application Questions1. Your company has been struggling financially for quite some time now. You have a chance of making a profit this quarter, which is sure to bolster your stocks sagging price. But it depends on your using a low cost waste disposition practice. The disposal practice is legal but youve also seen some studies indicating that it is likely to harm the environment. What would you decide to do and why?2. Choose a company and master a copy of its most recent annual report. (In most cases, you can access annual reports simply by clicking on the link for investors, unremarkably found on the companys home page. You can also try the IRIN Annual Report Resource Center at www.irin.com, or Annual Reports.com at http//www.annualreports.com.) Using the financial statements, calculate three of the r atios describe in this chapter. What conclusions can you draw from these ratios just about the companys financial strengths and weaknesses?3. Your small company has $25,000 in surplus cash right now. You dont want to commit these funds to any long-term investments because you know of some expenses coming up in about 8 calendar months that will require the use of this cash. But you would like to find some safe, liquid interest-earning investments where you could park your cash until it is needed. Youve decided that T-bills and money market mutual funds are your best options, but you want to find out more about both. Use the Internet to do some research about these cash equivalents, and then answer the questions below.How do you purchase T-bills? If you want to invest in T-bills, what is the minimum amount you can invest? Can you wander these bills before they mature? How do you receive the interest on T-bills? What is the interest rate earned on the most recent T-bills?How do you p urchase money market mutual funds? How do these funds protest from money market accounts? What are the different types of money funds? arthere any drawbacks to investing in these funds?Investigate deuce specific money market mutual funds. What interest rate does each currently offer is the minimum required investment for each?establish on your research, how much of the $25,000 would you invest in T-bills and how much in money market mutual funds? Why?4. Suppose that soon afterward earning your bachelors degree you are accepted into an MBA program at a prestigious university. It is an intensive program that would require you to be a full-time student for about eighteen months. What are the major financial costs and benefits of enrolling in this program? (Hint be sure to consider not just the out-of-pocket costs, but also any other financial sacrifices you might have to make if you became a full- time student.) Describe how you could evaluate whether enrolling in this program is a good financial decision. (Hint Keep in mind that the benefits of your education will be in the form of higher cash flows over your entire career.)5. Visit the sites of at LendingClub.com and Prosper.com to find out more about peer-to-peer (P2P) lending. How do these sites match small lenders and borrowers? How are the sites similar, and how do they differ? Do some additional research to find out what others are saying about the pros and cons of these sites. Would you be willing to participate in this type of arrangement as a borrower? Would you participate as a lender? Why or why not?Team childbedSelect 4 or 5 companies in the same basic market or industry, and print their most recent financial statements before class. Break the class into small groups, give each group the financial statements for one of the firms and have them work together to compute basic financial ratios for that firm. (The formulas for several common ratios are given in Exhibit 9.1. If you have a large class y ou can assign the same company to more than one groupand have the groups compute different ratios.) and so have each group report their results. Compare the ratios reported by each group. In cases where ratios differ significantly among the firms, discuss the implications of these differences.Case ConnectionsAvoiding a change CrashYour companys sales are truehearted and have been growing rapidly, and your recent income statements show that youve earned a hale profit each of the onetime(prenominal) three years. But despite this good news your firm has faced a series of cash flow problems in recent years. On several occasions youve had to scramble to find cash to pay your bills. You feel like youve been pushing your luck and you encounter unless you make some changes in how you manage your cash and other current assets your problems are likely to continue. In fact, youve already identified three major concerns. You believe that once these concerns are addressed you will have don e for(p) a long dash to reducing the possibility of a in truth cash crisis.Your first challenge is to find some way to get a better handle on how your cash flows are likely to vary over the year. In the past youve just made can of the pants estimates about the amount of cash youll receive each month and the payments youll have to make. These estimates havent al slipway been accurate, which is a key former youve had to scramble for funds. You want to develop a more rigorous way to predict when youll have shortages of cash so that youll have more time to make adjustments or find additional sources of funds.A second problem you have concerns your credit customers. You know that offering credit to customers is a prerequisite a cash only policy would likely cause umteen of your customers to take their business elsewhere. But during the recent recession many of your customers began pay lateand some didnt pay at all. The slow payments intelligibly contributed to your cash flow prob lems. You wonder if there are some ways you could still offer credit while doing a better business line of collecting payments in a timely fashion.Finally, even though cash is tight in some months, you know that there are other months when your business generates substantial cash surpluses. Youve been reluctant to invest these surpluses in the past because, with all of the cash flow problems and uncertainties youve faced, you didnt want to tie up funds. But now you are beginning to realize that such a policy has an opportunity cost. You wonder whether there are some safe, liquid assets where you could temporarily invest your excess cash.You DecideHow is it possible for a juicy and rapidly growing company like yours to experience cash flow problems? What can you do to improve its forecast of cash shortages and surpluses?How can your firm deal with its credit customers? What trade-offs are involved if you make changes in your credit policies? Is there any other way you could turn yo ur credit sales into cash more rapidly?What is the opportunity cost of holding cash? What are some short-term investments that would be good choices when your firm has fly-by-night surpluses of cash? Describe these investments and explain why they are good places to temporarily park your cash.SourceWhat Are property Equivalents? Wise Geek website http//www.wisegeek.com/what-are-cash-equivalents.htm Cash and Cash Equivalents, Wikinvest website http//www.wikinvest.com/metric/Cash_And_Cash_Equivalents Cash Budget, Investopedia website http//www.investopedia.com/terms/c/cashbudget.aspaxzz1VEzc8Z9U Cash Budgets/Cash Budgeting, Accounting for Management website http//www.accountingformanagement.com/cash_budget.htm Credit Policy, Entrepreneur.com website http//www.entrepreneur.com/encyclopedia/term/82124.html How to Create a Smart Credit Policy, Inc. magazine website http//www.inc.com/magazine/20090301/how-to-create-a-smart-credit-policy.html